Following success in London, we are bringing our Trade Surveillance for Energy Trading Firms course to Amsterdam for the first time. Covering topics such as effective monitoring and complying with maâ¦

The Energy Risk Awards recognise excellence across global commodities markets as well as providing a unique opportunity for companies across the industry to gain valuable recognition. Winning an Enerâ¦

Being recognised at the Hedge Funds Review European Performance Awards 2018 is the high point of any single manager or fund of hedge fund operating in Europe. The awards are recognised as the most prâ¦

This white paper discusses the key challenges and opportunities facing banks as they prepare to implement the Fundamental Review of the Trading Book standard. It further examines how data aggregationâ¦

This white paper examines the key elements of Basilâs updated rules for IRRBB and the effect they will have on a banksâ ALM strategy. It further explores how a well-thought-out tenor mismatch strategâ¦

Chartis Research provides unrivalled, impartial and deep research and analysis on all aspects of the risk technology space, supporting the world's top decision makers with outstanding risk technology insight and advice.

Need to know

This paper investigates the pricing of a weather derivative that results being effective in a well-defined geographical area;

The main result is the determination of the value of a temperature-based forward option contract.

Abstract

Recent international policy initiatives focus on reducing carbon emissions to limit warming. It is almost universally recognized that risks connected to climatic changes are unpredictable in their consequences. Moreover, attempts (for instance, the 2016 Paris conference) to manage climatic changes at a global level have been counter-balanced by ambiguous US policy. Surprisingly, the financial world does not seem to care much about this problem. Yet, it is estimated that 80% of world industries (ie, agriculture, construction sector and hospitality activities) are affected (totally or in part) by climate. Rain or low temperatures disrupt tourism; heavy rain or high temperatures devastate crops and damage farmers. This work contributes to existing literature by proposing temperature-based risk management using hybrid financial instruments built on weather derivatives. Based on well-established literature, we first model temperature time series; we then price one-month forward option contracts for hedging adverse outcomes. Our results exploit the daily temperature data set (1951–2016) collected in Arezzo, Italy. We then show how a “negative” weather performance can be counterbalanced by the “positive” performance of a hedging over-the-counter financial instrument, which can be tailored to meet specific needs.